A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act that is engaged in the business of loans and advances, acquisition of shares/stocks/bonds, leasing, or hire-purchase.
In simple terms, an NBFC provides bank-like financial services but does not hold a banking license. Think of it as a financial institution that can do some things a bank can do (like give loans), but cannot do others (like accept demand deposits).
NBFCs vs. Banks: The Key Differences
This is the most important part to understand for your exam. While both lend money, there are fundamental differences between them.
Feature | Commercial Bank | Non-Banking Financial Company (NBFC) |
Primary Law | Governed by the Banking Regulation Act, 1949. | Governed by the Companies Act, 2013. |
Accepting Deposits | Can accept both demand and time deposits. (Demand deposits are funds in savings/current accounts). | Cannot accept demand deposits. Can only accept time deposits for a specific tenure. |
Payment System | Is a part of the payment and settlement system; can issue self-drawable cheques. | Is not a part of the payment and settlement system; cannot issue self-drawable cheques. |
Deposit Insurance | Deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakhs. | The DICGC facility is not available for NBFC depositors. |
Maintenance of Reserves | Must maintain CRR and SLR. | Not required to maintain CRR or SLR in the same way as banks. |
Types of NBFCs
NBFCs are categorized based on their principal business activity. Some important types are:
- Asset Finance Company (AFC): Provides financing for physical assets like automobiles, tractors, and machinery. Example: Shriram Transport Finance.
- Investment Company: Engaged in the business of acquiring securities (stocks, bonds).
- Loan Company: Provides finance in the form of loans for purposes other than asset finance. Example: Bajaj Finance.
- Infrastructure Finance Company: Provides long-term loans for infrastructure projects.
- Micro Finance Institution (MFI-NBFC): Provides small loans to low-income groups, as discussed in the previous topic.
Role of NBFCs in the Indian Economy
NBFCs play a vital role in the financial system:
- Financial Inclusion: They often cater to niche segments and borrowers that traditional banks may not serve, such as small businesses and individuals without a formal credit history.
- Competition: They provide healthy competition to commercial banks, leading to better products and services for customers.
- Economic Growth: They are a significant source of credit for sectors like infrastructure, commercial vehicle financing, and small businesses, thus contributing to economic growth.
All NBFCs are regulated by the Reserve Bank of India (RBI), which sets the rules for their registration, operations, and supervision.